Price action trading is based on trading decisions on the price movements of a currency pair. Indicators or other methods of analysis are usually not used, or given very little weight in the trading decision process.
A price action trader believes that the only true source of information is the price itself. If a currency is going up, that tells the price action trader that people are buying. The trader will then assess, based on how aggressive (volatile) the buying is, whether it is likely to continue. Price action traders are hardly ever concerned with “why” something is happen.
Using historical charts and real-time price information (such as bids, offers, volume, velocity and magnitude) the price action trader looks for a favorable entry point.
A favorable entry point is one that allows risk to be controlled, but that also offers a potential profit.
Which strategies are there?
There are many price action strategies. A very common price action strategy is called a breakout. When the price of a currency pair has been moving with a certain tendency, when it breaks that tendency it alerts traders to a new possible trading opportunity.
A breakout doesn’t mean the price will continue in the anticipated direction, often it doesn’t. This is called a false breakout, and also presents a trading opportunity in the opposite direction of the breakout.
Once you know a price action strategy there is little research time required. You find an asset with the specific price conditions you need, or you wait for those conditions to develop. Another benefit is that you often get more favorable entries and exits compared to many indicator based methods. The reason is that indicators are based on price, but lag behind it. By simply focusing on price you get the information in real-time, instead of waiting for a lagging indicator to give you information.
For more information about price action trading, please contact us.